Spain and U.K. step in to shore up banks

Caja Castilla-La Mancha gets government support; Dunfermline sold

By

SimonKennedy

LONDON (MarketWatch) -- Spain's Caja Castilla-La Mancha and the U.K.'s Dunfermline Building Society joined the growing list of rescued European financial institutions over the weekend as the economic downturn and deteriorating housing markets continued to exact a toll.

The Bank of Spain said Sunday that it had appointed a team of administrators to run the troubled Spanish savings bank and added it will provide funds backed up by a guarantee from the Spanish government pegged at 9 billion euros ($11.8 billion).

Caja Castilla's entire board was relieved of duty over the weekend as the central bank stepped in to take over its operations -- the first banking rescue in Spain since the start of the current crisis. It came about after attempts to secure a merger with larger local rival Unicaja failed.

Spain has been one of the housing markets hit the worst in Europe, and Credit Suisse analysts say there is more to come.

"In our view, the correction in [Spanish] housing prices is just beginning," Credit Suisse said Monday in a note to clients.

The broker said year-on-year declines in house prices have accelerated, but the average family still needs more than seven years of their combined salary to buy a house, compared to about three years in the U.S.

Analysts at Iberian Equities said the intervention may have been triggered by significant deposit withdrawals in recent weeks, with press reports indicating about 1.5 billion euros had been taken out by customers.

"We expect additional help for other institutions to follow, but not necessarily through Bank of Spain interventions," Iberian Equities said.

It estimated Spanish savings banks may need additional capital of 15 billion euros to 21 billion euros by 2011 to meet current rules on provisions.

Shares of Spanish banks fell Monday as most of the European banking sector declined, with Banco Santander
STD, +0.45%
losing 4.9% in Madrid.

Also dragging the sector lower were reports that Swiss banking giant UBS
UBS, +0.33%
(UBSN) may cut another 8,000 jobs and take more write-downs as well as comments from Treasury Secretary Timothy Geithner that some U.S. banks will need large amounts of further assistance.

Shares of UBS dropped 6.8% as BNP Paribas (BNP) fell 6.7% in Paris.

Dunfermline rescued by Nationwide

Meanwhile, mutually owned Dunfermline Building Society also joined the ranks of rescued lenders Monday when the Bank of England said it had used new powers to transfer its operations to Nationwide Building Society.

The central bank said Dunfermline's retail and wholesale deposits, branches, head office and originated residential mortgages have all been transferred after the Financial Services Authority ruled the firm was unlikely to be able to meet its requirements to continue operating.

It's the third time Nationwide has stepped in to rescue a fellow building society, having previously taken over the Cheshire and Derbyshire building societies last year.

Under the deal, Nationwide will take on the firm's 2.35 billion pounds of retail deposits and its prime mortgage book, valued at 1.02 billion pounds. Other assets -- including the commercial loan book, the source of much of the firm's losses -- have been placed in administration.

The U.K. Treasury said in a statement that an injection of taxpayer funds "would not be likely to provide value for money" and that such a move wouldn't provide a lasting solution for the lender.

That decision stood in contrast to other larger U.K. lenders, which have received direct government support.

The list of rescued banks includes Northern Rock, which was fully nationalized, as well as Royal Bank of Scotland Group (RBS)
RBS, +1.10%
and Lloyds Banking Group (LLOY)
LYG, +1.06%
in which the government now holds significant stakes.

"What is particularly disconcerting about this failure is that the institution was a mutual building society -- perceived to be less vulnerable to collapse," said analysts at BNP Paribas.

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